How, where and why embedded insurance is an innovation for our industry
Embedded insurance is not a new concept but it has fully emerged with the digitalization of many businesses. Online commerce has created a need to offer products or services at very competitive prices, with very low margins, forcing the merchants in order to remain profitable to develop ancillary revenue opportunities by cross-selling additional products or services related to the initial offer.
According to Scott Stice and Bob Besio from Accenture, “Embedded insurance is currently a red-hot topic in the industry”. But why is embedded insurance seen as one of the major recent innovations in our industry, and how can merchants benefit from this additional revenue opportunity for their distribution channels?
There are many different definitions of embedded, but I think all converge to the same approach: Embedded insurance is an insurance product that can be purchased within (or in combination with) the acquisition of another product or service.
As such, we can agree distribution segments such as bancassurance, related offers (offering insurance in the digital universe of a partner) or linked propositions (a white label site in a partner’s website) cannot qualify for embedded schemes. But they can be interesting additional contributions to embedded offers.
Embedded insurance is not a new concept but it has fully emerged with the digitalization of many businesses. Online commerce has created a need to offer products or services at very competitive prices, with very low margins, forcing the merchants in order to remain profitable to develop ancillary revenue opportunities by cross-selling additional products or services related to the initial offer.
We can identify mainly two models of embedded insurance: optional or mandatory. We will focus on the former, as mandatory embedded insurance is very restricted and not supported by regulators in many countries.
Travel has been an industry heavily involved in optional embedded insurance, with initially low-cost carriers such as EasyJet and Ryanair, and online travel agents such as Expedia or Opodo, offering this service in their booking path since the early 2000s. Their business model, fully digital with a high proportion of non-cancellable/non-refundable tickets, was a unique repository for developing this service as an ancillary revenue to their main activity. Travellers are happy to pay less for their flight ticket or their package and enjoy the possibility to protect their purchase with travel insurance coverage in case they need to cancel their trip or if something goes wrong during their stay abroad. Thanks to flexible insurance regulations across many jurisdictions, opt-out (or ‘Yes, I want to buy travel insurance’ pre-selected) provided a very high volume of policies sold (exceeding 20 to 30% take rate) and a very low claim ratio. With the introduction of the EU regulation in 2012, flight cancellation insurance can no longer be automatically included in online prices and must instead be offered on an ‘opt-in’ basis only. Many countries outside the EU are now similarly restricting the usage of opt-out. It is now perceived as too aggressive by many distributors. This has an impact on the conversion rates (and on the claim ratio) but thanks to improved technology with better travellers’ customization, the model remains profitable for both the insurers and the distributors without compromising massively on the benefits for the policyholder.
We can find similar examples of optional embedded insurance in other industries including automotive (with car dealerships licensed to sell motor insurance and financial services), retail (when customers can buy an extended warranty when they buy an appliance) or car rental (with insurance offered on top of a rental).
In all cases, the support of technologies is critical to ensure the success of embedded insurance for distributors. We have seen during the last years many insurtechs partnering with insurers. Their main goal is to improve the customer experience with purchase path, product design, price elasticity and the claim experience being the key drivers of the value proposition. The introduction of parametric insurance is one of the latest innovations supported by embedded insurance. There are many recent examples of such partnerships including simplesurance, launched in 2016 and recently acquired by Allianz (following several years of collaboration with Allianz Partners), Ancileo and their multi-year collaboration with AXA Partners, Qover, supported by Wakam across many European countries, or Setoo, backed by the AXA group insurtech studio Kamet since 2017 and acquired last year by the US carrier Pattern Insurance.
In all cases, it is important to note that for most embedded insurance offerings, the consumer doesn’t have the opportunity to choose their carrier or the level of protection. Only one product is usually offered, matching the consumer’s needs according to the product or service purchased. The policyholder needs to have a high degree of trust that the vendor is proposing the right coverage.
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